Top Hedge Fund Managers Paid Well, as They Should Be

Hedge fund managers are more vilified for their pay packages by the media and the public than public company CEOs are. To some extent, the attacks are understandable, at least on the surface. Hedge fund managers can make hundreds of millions of dollars a year, while the highest paid CEOs make only tens of millions. The difference is that hedge fund managers are generally paid by very specific performance measures.

Hedge fund managers may be well paid, but the effects of poor performance can be extreme. It is not unusual for funds that have done poorly to lose a large portion of money they manage, even to the extent that funds can be forced to close. That is the ultimate “pay for performance” penalty.

The latest version of a study done by Institutional Investor was released recently. Authors of the “Rich List” reported that several managers returned 20% to 30% improvements in the value of their funds. These included David Tepper of Appaloosa Management, Leon Cooperman of Omega Advisers and David Loeb of Third Point. Managers who have had longer term success also made the list. These include Ray Dailo of Bridgewater Associates and Steven Cohen of embattled SAC Capital. None are strangers to lists of top hedge fund managers.

Extraordinary high pay nearly always brings out the historical comparisons with the compensation of teachers, fireman, police and blue-collar workers. In these professions, at least, workers are part of a huge infrastructure of support, paid for by the public or shareholders. While that does not lower the value of their contributions to society or private enterprise, it does partially explain why employees supported by massive investment in the systems in which they operate are paid modestly.

The pay level of teachers has to be measured in part by the fact that school buildings and books are paid for by the public, and that many of those investments have been in place for years. For blue-collar workers at large manufacturing companies, the facilities in which they work are usually the product of billions of dollars in factories and production line investments made by their employers, often long before these people take their jobs. In all cases, the level of risk to the job security of public and large corporation workers is fairly small.

In the debate over the pay of investment managers, a single factor explains some of what is considered “obscene” pay. Underperformers get put out of business.